Mr. ASH. The figure is $29 billion rather than $29.5 billion. I did say $29.5 earlier, but in looking at our up-to-date data, it is $29 billion. At the beginning of the year interest was estimated to be $26.1 billion.

Mr. ULLMAN. That is $3.4 billion more.

Mr. Asн. That is a $2.9 billion increase.

Mr. PETTIS. I am still confused, Mr. Chairman. Could we have those again.

Mr. Asн. The original estimate for interest for this fiscal year, was $26.1 billion. That number is now expected to be $29 billion. That $2.9 billion increase results entirely from higher-than-anticipated interest rates.

Mr. ULLMAN. Mr. Secretary, this is a staggering amount. What are we paying now?

Secretary SHULTZ. We pay different rates on different securities. Mr. ULLMAN. On your 7-year and under this new authority we gave you for long term, what are you paying?

Mr. VOLCKER. Under the authority for longer term bonds we have paid rates ranging, I think, roughly up to 7.5 percent which we had to pay this summer and as little as 61% percent.

Mr. ULLMAN. What is the term of those obligations?

Mr. VOLCKER. The 72 percent bonds mature in 20 years. They have a call date on them in 15 years.

Mr. ULLMAN. 712 percent.

Mr. VOLCKER. That was a very small amount of bonds. If we are including the ones sold to the trust accounts, the issue was less than $1 billion.

Mr. ULLMAN. That is a shocking interest rate.

Mr. VOLCKER. The reason that the interest cost estimates have gone up so much since January and since June is more largely because the short term rates have gone so sharply. We had a period when Treasury bills rates moved to about 9 percent. They have moved down below that now. They are down close to 714 percent-a little below 714, percent a little above, depending on the maturity. A year ago those rates were under 5 percent. Six months ago they were not much over 6 percent.

So, when you move to a cycle and we do have a large amount of debt maturing in short periods of time, from 5 to 6 percent up to 9 percent, now down to 7 percent, it makes a substantial impact.

Mr. ULLMAN. What is the rate on 7-year paper?

Mr. VOLCKER. On 7-year paper it is currently about 634 percent or a little more.

Mr. ULLMAN. Is that now above the short term?

Mr. VOLCKER. Right now it is below. Typically, historically rates tend to get higher as maturity gets longer, but in recent months it has been the other way around; the shorter the security, the higher the rate.

Mr. ULLMAN. Is there any downward trend for the short term?

Mr. VOLCKER. There has been a trend downward in recent months. There has been a sharp movement downwards in all interest rates in the market since mid-August. It has been particularly sharp recently.

Mr. ULLMAN. Would you agree, Mr. Secretary, that there has been an over reliance on monetary policy during the past year?

Secretary SHULTZ. Not particularly. The budget has changed its picture. It has really been running more or less in balance since January. So there has been a considerable takeup of fiscal

stringency.

I think we face the unpleasant fact that when an economy is roaring along and you apply discipline to it, at the end of the line that discipline bites. It bites in the form of higher interest rates, it bites in the form that we have wage and price controls, telling somebody that they can't put their price up as high as they want to and so on. Those are all unpleasant things.

Perhaps we could have stood a little more fiscal discipline, and we could have stood a little bit more monetary discipline in the past year. But on the whole I think the balance has not been that bad. Mr. ULLMAN. I believe we have had the highest interest rate structure in the history of this country, in the last few months haven't we?

Secretary SHULTZ. Right. It is not a desirable thing in our view to have such high interest rates. On the other hand, in a given situation they perform a function, and we mustn't allow ourselves to fail to recognize that function.

Mr. ULLMAN. I think we have to admit that our house is out of order.

Secretary SHULTZ. Right. There is no doubt about it. Inflation is too high and we have to keep concentrating on doing all the reasonable things we can think of to bring that rate of inflation down. It is the rate of inflation that basically affects the interest rate.

Mr. ULLMAN. Mr. Director, there is this overage of about $3 billion in interest rates. What other overages have you had of any size?

Mr. ASH. Listed on page 4 of my statement are the changes that were made since the June estimates: food stamp liberalization, and repeal of wheat processing charges $1.1 billion; veterans programs, $400 million; Federal pay raise, $300 million; social security and medicaid benefits, $200 million. There are some other smaller ones that add up to $400 million. All of these have resulted from completed congressional actions that have now become law.

The other changes shown did not arise from congressional action. Most were automatic, such as the increase in the interest payments that we have already discussed. Other increases include: medicaid costs, veterans readjustment benefits, Federal employee retirement funds, and the Federal Housing Administration fund. There were also some offsetting reductions: farm price supports; interest received and other offsets (which are payments to Government accounts); and the Continental Shelf rentals, which we have talked about, brought in $2.3 billion more than was anticipated in June.

Mr. ULLMAN. Mr. Ash, why is interest set down as only $2 billion then?

Mr. Asн. The $112 billion increase is to the June 1 estimate. You may remember we submitted to you on June 1 a reestimate of our expenditure levels. At that time we had already expected a $14 billion increase in interest. This is the increment from June.

Mr. ULLMAN. What assumptions did you make, Mr. Secretary, in projecting your estimated debt? What economic assumptions did you make with respect to the next year, to the next 8 months?

Secretary SHULTZ. You are speaking about what we assumed about the GNP?

Mr. ULLMAN. Yes.

Secretary SHULTZ. On table 2 you see the line, "underlying income assumptions for calendar year 1973." We show there the assumptions that we made in the January budget, the assumption that we made on May 1 and in the midsession budget review, and the assumptions we are now making about GNP, personal income, and corporate profits before tax-those being the factors that have the biggest impact on the revenues.

Mr. ULLMAN. What inflationary factor have you anticipated?

Secretary SHULTZ. We have had, of course, had to revise upward unfortunately, the estimate that we started with. We had estimated a full-year average rate of around 3 percent. We now recognize that it is more likely to be on the order of 412 to 5 percent if we do well from here on out.

Mr. ULLMAN. More than likely, 5 percent?

Secretary SHULTZ. I would guess that is probably right, although we have had some rather sharp changes in underlying commodity prices. I would like to call the committee's attention to those commodity price declines because they are quite startling in many ways, and we are working hard using our price control system as best we can to try to push these declines in the raw agricultural market prices down through to the retail level.

If you compare yesterday's closing price with the maximum daily price since last June, in soybeans there has been a decline of 56 percent. In soybean meal, 64 percent, soybean oil, 39 percent; in wheat, 20 percent; corn, 32 percent; cattle, 29 percent; hogs, 30 percent; broilers, 45 percent. In honor of cottonpicking hands, we put cotton in the table yesterday. That is down 11 percent. I would be glad to put the table in the record. This represents yesterday's tabulations.

Mr. ULLMAN. Without objection, we will put that in the record. It does indicate some significant progress.

[The table follows:]

CLOSING PRICES, TO DATE, COMPARED WITH AVERAGE CLOSING PRICES, JUNE 1-3, SOYBEANS AND SOYBEANS PRODUCTS, WHEAT, CORN, CATTLE, HOGS AND BROILERS

Note: Futures limits, daily: Soybeans-20¢ per bushel (all options); S/B Oil-1¢ per pound (all options); S/B Meal$10.00 per tor. (all options); Wheat-25¢ (all options); Corn-10¢ (all options); Cattle-1¢ per pound (all options); Hogs11⁄2¢ per pound (all options); Ice Broilers-2¢ per pound (all options).

Source: Chicago Board of Trade (Wall Street Journal and Reuters).

Mr. ULLMAN. Of course, when you look at soybeans, your figures are based upon such an exorbitantly high price

Secretary SHULTZ. No doubt; no argument.

Mr. ULLMAN [continuing]. That you are not at a normal price yet even with a 50 percent decrease; are you?

Secretary SHULTZ. I agree with that. In early June the cash price for soybeans was $11.10 per bushel. That was at the time of the freeze. The maximum got up to $12.27. Yesterday it closed at $5.34. That is still way above the $2.50 or so when people thought if they could get $3 that would be terriffic.

Mr. ULLMAN. Thank you. I hope to get back to you. I see Mr. Archer and Mr. Waggonner are here. Mr. Archer, do you have some questions? Mr. ARCHER. Thank you, Mr. Chairman. Is it true that we have operated on a unified balanced budget for every month of this year?

Secretary SHULTZ. I don't suppose we could calculate it well enough on a month-by-month basis.

Mr. Ash. It is obvious by looking at the general flow of expenditures relative to receipts that, starting with January of this year and comparing the record with earlier years, we have been in approximate balance. Not month by month because the receipts flow in in peaks and valleys.

Mr. ARCHER. Was fiscal year 1969 the first year this Nation went on a unified-budget concept?

Secretary SHULTZ. In 1968 when the committee recommended it, I think they recommended it in 1967, and we switched over during the course of fiscal 1968.

Mr. ARCHER. The year ending June 30, 1968, was handled on a unified-budget basis?

Mr. MCOMBER. Yes; actual data were presented on the unified budget basis.

Mr. ARCHER. How long has it been since we have had a Federal funds balanced budget?

Secretary SHULTZ. That is somewhat akin to the old administrative budget concept, I believe. We would have to go back into the Eisenhower administration to find out, I think. We will get that.

Mr. ARCHER. You mean it has been almost 20 years since this Nation has had an operating Federal funds balanced budget?

Secretary SHULTZ. In response to a question of Mr. Archer, we found that you go back to 1960 to find a year when we had a Federal funds surplus.

Mr. ARCHER. We have had the advent of a number of new factors that have come into the picture of the Federal Government recently. For one, the courts are now exercising authority in commanding the expenditure of funds on the part of the Executive. How much actual control do you feel you have today over the fiscal affairs of this Nation in the executive branch.

Mr. Asн. Let me comment. I am sure there is so much to be said that Secretary Shultz will like to add to it.

As you know, the budget at this time is about 75 percent relatively uncontrollable. Over half of the total is made up of interest, social security, and other absolute obligations where there is no discretion. Another fifth of the total outlays this year relate to decisions made 2, 3, and 4 and 5 years ago on long-time commitments that call for outlays this year. In that sense it is only the remaining 25 percent that is considered controllable.

Even the controllable portion includes, as an example, pay to the armed services, and we don't imagine that we will close down the military tomorrow. Basically there is a very small proportion of outlays which we can affect in that year. That is why it is so important that we work at that margin, because that is all there is available to us. We can make important decisions for 2 and 3 and 4 and 5 years hence. It is important that we make those also. But the limited amount of action in the short run is something that requires that we all work together to do the things that can be done, or else the budget will control itself, and we will have no means of affecting its totals.